1. 3. KEGAGALAN PASAR DAN INTERVENSI PEMERINTAH

2. 3.1. Masalah kegagalan pasar
In reality, no market such a perfectly competitive market. Market tends to be imperfect
Hence, Pareto Efficiency cannot be achieved if rely on market mechanism in allocating resource in the economy

3. 3.1. Problems of Market Failures (2)
More over, efficiency in allocation of resources is not the only concern of people.
People need some other than resource allocation efficiency, such as more equal distribution of income, good condition of environment, elimination of unemployment and popverty

4. 3.1. Problems of Market Failures (3)
All these are beyond market concern. Since, the market only deals with efficiency
Government intervention is required to satisfy these other needs of people

5. 3.1. Problems of Market Failures (4)
In short, if market fails to achieve pareto efficiency and fail to deliver the other needs of people the government has to substitute the role of market to satisfy all these
Market failures  government intervention to improve welfare of the society

6. 3.2. Sources of Market Failures
Public goods
Externalities
Natural monopoly
Imperfect information
Merit goods
Income distribution/equality
Unemployment
Inflation

7. Three main characters: Non-rivalry Non-excludable Non-congest
3.3. Public Goods (1)
Three main characters:
Non-rivalry
Non-excludable
Non-congest

8. 3.3. Public Goods (2) Three types public goods:
Excludable, non-rival public good
impure public goods
Non-excludable, rival public goods
 impure public goods
Non-excludable, non-rival public good
 pure public goods

9. 3.3. Public Goods with Excludable, Non-rival Characters (1)
Example: Free way
Exclusion makes the service marketable
Price > 0 even though MC =0 provision by private sector becomes feasible
But, private provision will not be Pareto optimum.
Since, price will be determined not by market mechanism (S and D)
 MC = P, MC = 0, hence P = 0

10. 3.3. Public Goods with Excludable, Non-rival Characters (2)
Price must be determined by mechanism other than market mechanism, such as government decision
Consequently, the determined price may be too high or too low
 Provision will not be optimum
Though not achieve ‘Pareto Efficiency’, private provision will result in social improvement

11. 3.4. Public Goods with Non-Excludable, Rival Public Characters (1)
Common property resource
Example, ocean fishing ground
If market mechanism over fishing
Tragedy of the Common
Individual rationality leads to collective disaster

12. 3.4. Public Goods with Non-Excludable, Rival Public Characters (2)
Resource depletion and dissipation of economic rent
Economic rent  incentive for conservation
Pareto inefficiency
Government intervention is desirable to improve the condition

13. 3.5.Public Goods with Non-Excludable, Non-Rival Public Characters (1)
Example, lighthouse
Collective action to build
Free rider as constraint for collective action to take place
If free rider problem is not controlable lighthouse will not be present
Hence, government intervention is desirable in building the lighthouse

14. 3.5.Public Goods with Non-Excludable, Non-Rival Public Characters (2)
However, when ‘ a privilege group’ exists  private provision of the lighthouse is feasible even though free riders are at large
But, the private provision will not be pareto efficiency  undersupply
Hence, government intervention is desirable to improve the supply

15. 3.6. Externalities (1) Two types by characters :
Negative  e.g. air pollution by manufactures
Positive  e.g. fresh air produced by Bogor botanical garden
Two types by sources :
Consumption  demand curve
Production supply curve
Government intervension is desirable

16. 3.7. Positive Externalities: Problem of Under Supply of Goods
Generating Positive Externalities
Price
Socially
Optimum
MSB
MPB
MPC Ps Pm Qm Qs
Note: Qm < Qs

17. 3.8. Negative Externalities: Problem of Over Production of Goods
Generating Negative Externalities
Price
Socially
Optimum
MSC
Supply Curve Ps
MPC Pm
Demand Curve MB Qs Qm
Note: Qm > Qs

18. 3.8. Natural Monopoly (1)
Natural Monopoly?
Cost production declines as scale operation increase  economies of scale
Cause  large total fixed cost
Example,
Production electricity
Airport service for airline landing and take-off

19. 3.8. Natural Monopoly(2) Large economies of scale
 production is best by a single big firm
If monopoly right is granted to a private firm, it may not produce the required goods at the lowest cost
Instead, it may produce at level that satisfy MR = MC to earn extra profit

20. 3.8. Natural Monopoly(3)
If produced at MR = MC  P > MC. Thus, social loss will prevail
Social loss  pareto inefficiency
Government intervention is required to correct the condition
Government own firms (e.g. PT PLN and PT Angkasa Pura)
But, government own firms often create another kind of inefficiency problem ?

21. 3.9. Imperfect Information (1)
Facts
Information is imperfect
Information is costly to acquire
Direct consequence  Asymmetric information between market actors
E.g Buyer vs seller, employee vs employer

22. 3.9. Imperfect Information (2)
Consequences :
Moral hazard problem
Adverse selection problem
Missing markets (e.g absence of crop insurance in Indonesia )
Government intervention is desirable to improve the condition

23. 3.10. Other Market Failures
Market is not concern about all these:  Provision of merit goods
 Controlling inflation
 Poverty alleviation
Controlling Unemployment
Income redistribution
Government intervention is desirable to address and solve them

24. 3.11. Government Failures (1)
Government intervention often fail to make improvement. Instead, it makes even worsened
Example, provision of electricity power by the government controlled monopolizing firm is often criticized of being inefficient

25. 3.11. Government Failures (2)
Why government failures occur?
Conflict of interest’
Political motives
Rent seeking activities

26. 3.12. Readings
Stiglitz, Joseph E “Economics of the Public Sector”. New York: W.W. Norton and Company. Chapters 4 and 5
Weimer, David L. and Vining, Aidan R “Policy Analysis: Concepts and Practice”. New Jersey: Prentice Hall. Chapters 3,4 and 5.